COMMITMENTS AND CONTINGENCIES

Operating Leases

We lease office space, automobiles and certain equipment under agreements expiring on various dates through 2019. Future minimum lease payments under non-cancellable operating leases that have initial or remaining lease terms in excess of one year as of December 31, 2013 are as follows:



Year of Payment	Amount
2014	$	607
2015	434
2016	426
2017	428
2018	430
Thereafter	458
Total	$	2,783

For the years ended December 31, 2013, 2012 and 2011, rent expense approximated $1,010, $964, and $879, respectively.

We are party to a sublease agreement with American Bailey Corporation (ABC) that obligates ABC to reimburse us for its share of lease and lease-related expenses under our February 1, 2010 lease of executive offices in Stamford, Connecticut. Please refer to Note 10 to the consolidated financial statements for a discussion of our relationship with ABC. The future minimum lease income under this non-cancellable sublease as of December 31, 2013 is as follows:



Year of Payment	Amount
2014	$	145
2015	155
2016	155
2017	155
2018	155
Thereafter	155
Total	$	920

The terms of the Company’s four primary lease arrangements are as follows:


•	The Stamford, Connecticut building lease term, for approximately 6,440 square feet, runs from February 1, 2010 to December 31, 2019. The facility houses certain administrative functions such as Investor Relations and certain APC sales functions.


•	The Beijing, China building lease term, for approximately 5,800 square feet, runs from September 1, 2013 to August 31, 2014. This facility serves as the operating headquarters for our Beijing Fuel Tech operation. We have the option to extend the lease term at a market rate to be agreed upon between Fuel Tech and the lessor.


•	The Durham, North Carolina building lease term, for approximately 16,000 square feet, runs from November 1, 2005 to April 30, 2014. We have no option to extend the lease.


•	The Gallarate, Italy building lease term, for approximately 1,300 square feet, runs from May 1, 2013 to April 30, 2019. This facility serves as the operating headquarters for our Italy operations.

Performance Guarantees

The majority of Fuel Tech’s long-term equipment construction contracts contain language guaranteeing that the performance of the system that is being sold to the customer will meet specific criteria. On occasion, performance surety bonds and bank performance guarantees/letters of credit are issued to the customer in support of the construction contracts as follows:


•	in support of the warranty period defined in the contract; or


•	in support of the system performance criteria that are defined in the contract.

As of December 31, 2013, we had outstanding bank performance guarantees and letters of credit in the amount of $4,124 in support of equipment construction contracts that have not completed their final acceptance test or that are still operating under a warranty period. The performance guarantees expire in dates ranging from January 2014 through September 2016. The expiration dates may be extended if the project completion dates are extended. Our management believes it is probable that these projects will be successfully completed and that there will not be a material adverse impact on our operations from these bank performance guarantees and letters of credit. As a result, no liability has been recorded for these performance guarantees.

Product Warranties

We issue a standard product warranty with the sale of our products to customers. Our recognition of warranty liability is based primarily on analyses of warranty claims experience in the preceding years as the nature of our historical product sales for which we offer a warranty are substantially unchanged. This approach provides an aggregate warranty accrual that is historically aligned with actual warranty claims experienced. Changes in the warranty liability in 2013, 2012 and 2011 are summarized below:



	2013			2012			2011
Aggregate product warranty liability at beginning of year	$	776		$	313		$	215
Net aggregate (income) expense related to product warranties	(68		)	1,208			650
Aggregate reductions for payments	(112		)	(745		)	(552		)
Aggregate product warranty liability at end of year	$	596		$	776		$	313

Contingent Consideration from Business Acquisition

In 2009, we recorded a contingent consideration accrual representing the fair value of the potential future consideration to be paid in connection with our acquisition of substantially all of the assets of Advanced Combustion Technology, Inc. (ACT). The contingent consideration earnout arrangement required us to pay ACT a pro rata amount of up to $4,000 annually for the achievement of a minimum annual gross margin dollar level (the Hurdle) of $10,000, $11,000 and $12,000 in fiscal 2009, 2010 and 2011, respectively. In addition, the agreement required us to pay ACT thirty-five percent of all qualifying gross margin dollars above the annual Hurdle rate for each of the three years. The potential undiscounted amount of all future payments that we could have been required to make was between $0 and $4,000 in any one year, and $0 and $12,000 in total, not including the amount related to the thirty-five percent sharing of qualifying gross margin dollars above the pre-determined Hurdle. The fair value of the contingent consideration at inception was $2,307, which was recorded as a liability when the business combination was initially recorded.

Each year while this earn-out was in effect, we evaluated the probability that payment of the contingent consideration accrual was probable based on a range of outcomes and assumptions used to develop the fair value estimate. Based upon this analysis, management concluded during the year ended December 31, 2011, that the payout was not probable of being made. Thus, we recorded a gain of $758 from the revaluation of the contingent liability in 2011. There is no contingent liability accrual remaining as of December 31, 2013.